Indonesia’s Rating Outlook Lowered Due To Stalled Reforms

May 3, 2013Indonesiaby EW News Desk Team

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Global credit rating agency Standard & Poor’s on Thursday cut Indonesia’s debt outlook from “positive” to “stable”, arguing that recent economic reforms had lost its momentum, while a weaker external profile had reduced the chance of an upgrade over the next 12 months, reported Bloomberg.

According to Bloomberg, S&P was the only big three rating agency last year not to lift Indonesia’s rating to investment grade, after Fitch Ratings and Moody’s had done so in December 2011 and January 2012, respectively.

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Although former Indonesian finance minister Agus Martowardojo suggested recently that S&P would raise its rating on Indonesia this year, noted the Jakarta Post, S&P now said that it may wait until next year’s parliamentary and presidential elections before deciding on an re-assessment.

“Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development,” S&P said in a press statement.

“Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation,” the rating agency added.

“This weakening policy environment may ultimately have a negative impact on growth prospects and the generally sound economic conditions,” they said.

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The largest policy problem that the Indonesian government currently faces is a burgeoning fuel subsidy burden, which could rise to 297.7 trillion rupiah ($31 billion) this year from the current target of 193.8 trillion rupiah. Indonesian government’s statistics showed that it presently spends more on fuel subsidies annually than it does on social programs and capital expenditures combined.

However cutting on fuel subsidies is also a politically sensitive topic ahead of next year’s elections. In 2005 and 2008, president Susilo Bambang Yudhoyono’s decision to raise gasoline prices caused protest among both the rich and poor – the former because he tried to give poorer Indonesians cash handouts to ease the blow.

Yudhoyono then lowered fuel prices before his landslide re-election in 2009, while keeping the handouts in effect, angering his political rivals.

When Yudhoyono in March 2012 once again proposed cutting state subsidies, even members of his own governing coalition threatened to challenge him, while student and labour groups clashed with riot police officers during a protest outside a House of Representatives session on live national television.

On Tuesday, Yudhoyono however reiterated that a subsidy cut was necessary for the economy, saying he would submit a revised 2013 budget to the House of Representatives in May that would include a fuel price increase, but revive the cash compensation program for poor families to cushion the blow. Last month, the government also floated the idea of a two-tier gasoline pricing plan meant to shield Indonesia’s poor and lower classes from higher costs.

“It’s better than nothing,” said Ndiame Diop, lead economist at the World Bank in Jakarta, to the New York Times. “It sends the signal that the government is doing something.”

“In my view, it (subsidy cuts) brings the stability that gives a chance for foreign investment to come and for us to build our economy,” added Didik Rachbini, a prominent economist and member of Yudhoyono’s National Economic Council.

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Rachbini however acknowledged that the government had to find some form of compromise for the poor, as increasing the price of fuel could potentially push tens of millions of near-poor Indonesians below the poverty line.

“If we increase fuel prices for everyone, the price of 15 to 20 basic goods will also increase, such as rice,” he said. “It would reduce the purchasing power of the poor.”

 S&P said yesterday again that it might raise the country’s rating if the fuel reforms are finalised, the state budget is improved, or if structural reforms boost economic growth. However, the assessment could be lowered if renewed fiscal or external pressures are not met with “timely and adequate policy responses.”

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